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Activision is primarily riding on its well-known franchises, which fueled top-line improvement in the quarter. Notably, Call of Duty: World War II was the top-selling console video game in 2017 globally. Destiny 2 was the second-highest selling console game in North America.

Quarterly Numbers

Excluding deferral revenues, Activision reported sales of $2.043 billion, up 20.2%. The top line was driven by strength in digital revenues, Overwatch, Call of Duty: World War II and Destiny 2.

Activision earned $1 billion in-game net bookings in the quarter.

Segment wise, product sales (36.1% of total net revenues) were $737 million, up 5.9%, while subscription, licensing and other revenues (63.9%) declined 0.9% to $1.306 billion.

On the basis of distribution channels, Activision reported retail channel sales of $335 million (down 10% year over year) and digital online revenues of $1.431 billion (down 2%). Digital revenues contributed 70% of total revenues in the quarter. Other revenues grew 47% year over year to $277 million.

On the basis of platform, revenues from console (33%) grew 16% to $679 million. Mobile and ancillary revenues (28%) increased 8% to $579 million. However, revenues from PC (25%) declined 28% to $508 million. We note that the share of PC revenues is declining while that of console and mobiles is going up.

On a geographical basis, revenues from North America (50%) increased 1% to $1.021 billion, while that from EMEA (38%) grew 13% to $780 million. Revenues from Asia Pacific (12%) fell 22% to $242 million.

The company had over 385 million monthly active users (MAUs) at quarter end, which increased 1 million sequentially.

King Digital reported MAUs of 290 million, down 1% sequentially. However, MAUs for Candy Crush increased slightly sequentially and drove time spent per player.

Activision had 55 million MAUs, flat year over year but up 12% sequentially, driven by the Call of Duty: WWII and Destiny 2.

Blizzard had 40 million MAUs, down sequentially, but maintained its sixth quarter of 40 million or more MAUs, backed by Overwatch and Hearthstone.

On a non-GAAP basis, operating income was $511 million compared with $681 million reported in the year-ago quarter.

Operating margin of 25% contracted 880 basis points (bps) on a year-over-year basis due to increase in marketing expenses.

Balance Sheet & Cash Flow

As of Dec 31, 2017, Activision had $4.7 billion in cash and cash equivalents, compared with $3.6 billion as of Sep 30, 2017. Activision exited the quarter with long-term debt of $4.39 billion.

Operating cash flow for the quarter was $1.158 billion while free cash flow was $1.089 billion.

Outlook

Management believes the release of new titles, expanding mobile pipeline and increasing initiatives in advertising, e-sports leagues and MLG network to drive growth. In-game net bookings are anticipated to show a double-digit percentage growth in 2018.

Release of World of Warcraft’s Battle for Azeroth in summer, focus on live operations and expansion of in-game content bode well for Activision Blizzard. The company also anticipates Overwatch League to be profitable this year. King Digital also has some releases, which includes social casino planned for this year. Destiny 2 is also scheduled for a new expansion in May as well as a major expansion in the second half of 2018. Additionally, the new version of Call of Duty in the fourth quarter as well as Call of Duty: World War II’s season pass is expected to drive growth for Activision.

The company also plans to ramp up ad business by rolling out more video-based ad products.

For 2018, Activision expects GAAP revenues of $7.35 billion and earnings per share of $1.78. On a non-GAAP basis, revenues and earnings are expected to be $7.35 billion and $2.45 per share, respectively.

The company anticipates product costs of 22% and operating expenses of 44% in 2018.

For first-quarter 2018, Activision anticipates GAAP revenues of $1.82 billion and earnings per share of 47 cents. On a non-GAAP basis, revenues and earnings are likely to be $1.82 billion and 65 cents per share, respectively.

The company anticipates product costs of 20% and operating expenses of 43% in the first quarter.

Long-term earnings growth rate for Micron, Lam Research and The Trade Desk is projected to be 10%, 14.9% and 25%, respectively.

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